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- Pages: 27
Bryan McKelvey
How do the lessons of the Japanese banking crisis in the 1990s apply to America’s crisis today? I propose constructing a timeline of unsustainable business actions taken by “too-big-tofail” financial institutions in the US and Japan.
2
Japan Then vs. The US Now Focus on less-known factors Private decisions made by corporate treasuries When losses became obvious versus when they were recognized in financial statements Accounting issues that have affected both crises What prevented Japanese banks from returning to profitability Using Japan as a metric, how far along is the US?
3
Methodology Interview treasury managers, including outside of
Tokyo: Sapporo – Hokkaido Takushoku Bank Kobe – Hyogo Bank Osaka – Kizu Credit Cooperative
Aggregate data from print resources, private Japanese
data sources, other researchers, etc.
4
Stages of the Crisis How should we look at the natural progression of
credit-driven recessions in major economies? Speculative financial products grow Recognition of first losses First wave of credit impairment write-downs
Regulatory actions begin Worst stages of crisis Regulations tighten
… but then what?
5
Banks at Risk How should the US
treat banks that have difficulty repaying TARP capital? How should we look at the systemic risks they present based on Japanese “zombie banks”?
Table 2. Implications of Bank Stress Test: Ability to Issue Capital and Pay Back TARP Funds (balances in billions, data as of May 12, 2009 and adjusted for recent capital actions) Ability to be well-capitalized without government assistance Ability to issue debt TARP money New common as a % of market Long-term 5-year CDS Bank to repay 1 equity needed 1 value of equity credit rating 3 spread GMAC 4 $ 5.1 13.4 N/A % CC 906 bps Citi 46.4 33.4 164.7 A 361 SunTrust 4.9 7.1 121.9 BBB+ KeyCorp 2.5 3.6 120.3 ARegions 3.6 3.9 110.3 A+ Fifth Third 3.5 4.6 96.5 ABank of America 45.4 65.0 83.5 A 188 PNC 7.8 7.7 39.2 AAMorgan Stanley 10.4 11.0 34.8 A 258 Wells Fargo 25.9 26.1 22.1 AA 146 US Bank 6.8 3.4 11.0 AA BB&T 3.2 1.3 10.3 AAAmerican Express 3.5 1.0 3.3 A298 Capital One 3.7 0.1 1.3 A217 MetLife A 586 Bank of NY Mellon 3.1 AAState Street 2.1 A+ Goldman Sachs 10.5 A+ 176 JPMorgan Chase 25.9 AA122 = May be unable to raise sufficient capital or issue long-term debt without FDIC assistance. = Need to raise capital. = May be able to repay TARP immediately. Several firms have already raised non-FDIC-backed debt. 1
Initial investment amount plus value of warrants to purchase common stock, when possible based on Congressional Oversight Panel, Assessing Treasury’s Strategy: Six Months of TARP, April 2009. 2 Estimate based on Supervisory Capital Assessment Program required capital buffer and TARP receipts. 3 Simple average of applicable Moody's, Standard & Poors and Fitch long-term unsecured debt ratings. 4 GMAC is privately held, therefore market value of equity and financial statements are unavailable.
6
From the late 90s onward, many cash-flow producing assets were securitized—pooled together, repackaged and sold to investors. The process made credit more accessible, but greatly increased systemic risks.
7
Early 2000s Lending Environment In previous downturns, certain areas of housing
suffered Regional economies (i.e. Texas during the oil shock) Luxury homes (homeowners “downgraded”)
A low federal funds rate encouraged increased lending
Borrowers had never defaulted en masse Traditional fixed-rate loans had low rates of return Home prices had only been going up
8
Securitization’s Promises Reduce regional risk – Pooled together loans from
across the country Regional economies Ensure stable demand for borrowers’ homes – Lent to low-to-middle income borrowers What could possibly go wrong?
9
The Results Securities were traded according to correlation, not
based on a loan-by-loan analysis of a borrowers’ credit. In fact, no buyer of mortgage securities had access to information on the original loans. Instead of eliminating regional risk, securitization created uniformly poor credit standards in many states, triggering a massive wave of defaults once the economy slowed.
10
S&P/Case-Shiller Home Price Index 250 200 150 100 50
0 1988
1992
1996
2000
2004
2008 11
The types of assets held by US financial institutions, and the potential risks going forward.
12
Asset Types Among Major US Banks ($bn) $1,000
$750 Other
$500 $250 $-
Other Consumer Credit Card Home Equity Residential Mortgage Construction Commercial
13
Unsustainable US Banking Profits Supplemental liquidity programs – Access to pre-trade
order flow that may be banned Dealing in government bonds – The US may issue over $3 trillion in debt this fiscal year, largely to pay for banking bailouts. Prime dealers will collect hundreds of millions in fees. Mortgage refinancing Risk absorbed by Fannie Mae and Freddie Mac, which may
require a net $200 billion bailout Very low mortgage rates mean people who refi now probably won’t refi again
Coming write-downs in commercial real estate, credit
cards
14
Major Obstacles Going Forward Reputational risk To stem losses, banks may have to foreclose more aggressively In 2008, banks that received TARP money paid out $32.6 billion in bonuses despite losing $81.0 billion. Public support for programs without immediate results is limited. Lack of profitable assets Fewer businesses and consumers are borrowing
15
Parallels to Japan Lacking good assets after the bubble collapse, many
Japanese banks invested their deposits in other banks Despite initial support for some bailout programs, lawmakers found it harder to address the crisis as it continued Low borrowing rates and high government spending may not be the key to economic growth
16
Some charts based on data from the Federal Reserve and Bloomberg
17
US Securitization Market Volume ($bn) Non-mortgage
Mortgage
$1,000 $750
$500 $250 $1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
18
US Securitization Market Mix ($bn) 2007 Other
2008 Other
Auto
Student loan Auto Student loan
Credit card Home equity
Home equity
Residential mortgage
Residential mortgage
Credit card
19
Earnings Down 30%
20
Revenues Shrinking for Most
21
Losses Are Actually Accelerating
22
Yet Stock Prices Imply Very High Growth
23
Some pages I’ve created to allow for easier dissemination of information on Japanese and US banks
24
Financial Events Calendar
25
Resources
26
Data
27
How do the lessons of the Japanese banking crisis in the 1990s apply to America’s crisis today? I propose constructing a timeline of unsustainable business actions taken by “too-big-tofail” financial institutions in the US and Japan.
2
Japan Then vs. The US Now Focus on less-known factors Private decisions made by corporate treasuries When losses became obvious versus when they were recognized in financial statements Accounting issues that have affected both crises What prevented Japanese banks from returning to profitability Using Japan as a metric, how far along is the US?
3
Methodology Interview treasury managers, including outside of
Tokyo: Sapporo – Hokkaido Takushoku Bank Kobe – Hyogo Bank Osaka – Kizu Credit Cooperative
Aggregate data from print resources, private Japanese
data sources, other researchers, etc.
4
Stages of the Crisis How should we look at the natural progression of
credit-driven recessions in major economies? Speculative financial products grow Recognition of first losses First wave of credit impairment write-downs
Regulatory actions begin Worst stages of crisis Regulations tighten
… but then what?
5
Banks at Risk How should the US
treat banks that have difficulty repaying TARP capital? How should we look at the systemic risks they present based on Japanese “zombie banks”?
Table 2. Implications of Bank Stress Test: Ability to Issue Capital and Pay Back TARP Funds (balances in billions, data as of May 12, 2009 and adjusted for recent capital actions) Ability to be well-capitalized without government assistance Ability to issue debt TARP money New common as a % of market Long-term 5-year CDS Bank to repay 1 equity needed 1 value of equity credit rating 3 spread GMAC 4 $ 5.1 13.4 N/A % CC 906 bps Citi 46.4 33.4 164.7 A 361 SunTrust 4.9 7.1 121.9 BBB+ KeyCorp 2.5 3.6 120.3 ARegions 3.6 3.9 110.3 A+ Fifth Third 3.5 4.6 96.5 ABank of America 45.4 65.0 83.5 A 188 PNC 7.8 7.7 39.2 AAMorgan Stanley 10.4 11.0 34.8 A 258 Wells Fargo 25.9 26.1 22.1 AA 146 US Bank 6.8 3.4 11.0 AA BB&T 3.2 1.3 10.3 AAAmerican Express 3.5 1.0 3.3 A298 Capital One 3.7 0.1 1.3 A217 MetLife A 586 Bank of NY Mellon 3.1 AAState Street 2.1 A+ Goldman Sachs 10.5 A+ 176 JPMorgan Chase 25.9 AA122 = May be unable to raise sufficient capital or issue long-term debt without FDIC assistance. = Need to raise capital. = May be able to repay TARP immediately. Several firms have already raised non-FDIC-backed debt. 1
Initial investment amount plus value of warrants to purchase common stock, when possible based on Congressional Oversight Panel, Assessing Treasury’s Strategy: Six Months of TARP, April 2009. 2 Estimate based on Supervisory Capital Assessment Program required capital buffer and TARP receipts. 3 Simple average of applicable Moody's, Standard & Poors and Fitch long-term unsecured debt ratings. 4 GMAC is privately held, therefore market value of equity and financial statements are unavailable.
6
From the late 90s onward, many cash-flow producing assets were securitized—pooled together, repackaged and sold to investors. The process made credit more accessible, but greatly increased systemic risks.
7
Early 2000s Lending Environment In previous downturns, certain areas of housing
suffered Regional economies (i.e. Texas during the oil shock) Luxury homes (homeowners “downgraded”)
A low federal funds rate encouraged increased lending
Borrowers had never defaulted en masse Traditional fixed-rate loans had low rates of return Home prices had only been going up
8
Securitization’s Promises Reduce regional risk – Pooled together loans from
across the country Regional economies Ensure stable demand for borrowers’ homes – Lent to low-to-middle income borrowers What could possibly go wrong?
9
The Results Securities were traded according to correlation, not
based on a loan-by-loan analysis of a borrowers’ credit. In fact, no buyer of mortgage securities had access to information on the original loans. Instead of eliminating regional risk, securitization created uniformly poor credit standards in many states, triggering a massive wave of defaults once the economy slowed.
10
S&P/Case-Shiller Home Price Index 250 200 150 100 50
0 1988
1992
1996
2000
2004
2008 11
The types of assets held by US financial institutions, and the potential risks going forward.
12
Asset Types Among Major US Banks ($bn) $1,000
$750 Other
$500 $250 $-
Other Consumer Credit Card Home Equity Residential Mortgage Construction Commercial
13
Unsustainable US Banking Profits Supplemental liquidity programs – Access to pre-trade
order flow that may be banned Dealing in government bonds – The US may issue over $3 trillion in debt this fiscal year, largely to pay for banking bailouts. Prime dealers will collect hundreds of millions in fees. Mortgage refinancing Risk absorbed by Fannie Mae and Freddie Mac, which may
require a net $200 billion bailout Very low mortgage rates mean people who refi now probably won’t refi again
Coming write-downs in commercial real estate, credit
cards
14
Major Obstacles Going Forward Reputational risk To stem losses, banks may have to foreclose more aggressively In 2008, banks that received TARP money paid out $32.6 billion in bonuses despite losing $81.0 billion. Public support for programs without immediate results is limited. Lack of profitable assets Fewer businesses and consumers are borrowing
15
Parallels to Japan Lacking good assets after the bubble collapse, many
Japanese banks invested their deposits in other banks Despite initial support for some bailout programs, lawmakers found it harder to address the crisis as it continued Low borrowing rates and high government spending may not be the key to economic growth
16
Some charts based on data from the Federal Reserve and Bloomberg
17
US Securitization Market Volume ($bn) Non-mortgage
Mortgage
$1,000 $750
$500 $250 $1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
18
US Securitization Market Mix ($bn) 2007 Other
2008 Other
Auto
Student loan Auto Student loan
Credit card Home equity
Home equity
Residential mortgage
Residential mortgage
Credit card
19
Earnings Down 30%
20
Revenues Shrinking for Most
21
Losses Are Actually Accelerating
22
Yet Stock Prices Imply Very High Growth
23
Some pages I’ve created to allow for easier dissemination of information on Japanese and US banks
24
Financial Events Calendar
25
Resources
26
Data
27
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